A growing order book coupled with improving cash flows should help the troubled wind power major to turn the corner this financial year.
The talks of a turnaround in Suzlon Energy are gathering pace with the share price shooting 24 per cent in April. Recent research reports suggest that winning a key order in Europe, improving global wind industry prospects led by higher crude oil prices, strong consolidated order book, benefits of debt restructuring and improving cash flows will help the company post profits in the financial year 2011-2012. These positive developments have led analysts to peg a price target of Rs 70-74 a share, a 34 per cent increase from the current market price of Rs 55. At this price, the stock is trading at reasonable valuations of 10 times its 2012-13 estimated earnings.
RETURN TO PROFITS
Suzlon has seen its revenue visibility improve, led by new orders both in the international and domestic markets. Its order book has improved from a low of 1,126 Mw in March to 2,578 Mw in the quarter ended December, encouraging given that the breakeven capacity utilisation stands at 1,900 Mw. In addition, REpower, its European subsidiary, has entered into the largest onshore agreement to supply 240 wind turbines of 720 Mw, indicating better visibility coupled with the sign of recovery in its key markets.
| ON THE ROAD TO PROFITS | ||||
| In Rs crore | FY10 | FY11E | FY12E | FY13E |
| Sales | 20,779 | 18,195 | 25,227 | 30,444 |
| Ebitda | 943 | 843 | 2,341 | 2,965 |
| Ebitda margin (%) | 4.5 | 4.6 | 9.3 | 9.7 |
| Net profit | -982.5 | -1173.2 | 551.2 | 937.1 |
| Return on Equity (%) | -15.7 | -14.2 | 8 | 12.3 |
| EPS (Rs) | -7.7 | -5.3 | 3.1 | 5.3 |
| PE (x) | NA | NA | 17 | 10 |
| E: Estimates Source: BofA Merrill Lynch estimates | ||||
Backed by a good order book, the company in 2011-12 on a consolidated basis is expected to sell about 4,230 Mw, about 40 per cent higher compared to the financial year 2011. This will also lead to a similar growth in revenues and profits, on the back of improving margins. Suzlon has been taking initiatives to outsource a part of REpower’s production to India, which together with higher utilisation is expected to result in operating margins improving from 4.6 per cent in 2010-11 to about 9.3 per cent in 2011-12. The strong improvement in the operating margins, coupled with stable interest cost, should help the company report a net profit of Rs 550 crore in 2011-12 and Rs 937 crore in 2012-13 as against the estimated net loss of Rs 1,173 crore in 2010-11.
EASING WORRIES
Liquidity has been another key issue, which has been bothering analysts tracking the company. However, as a result of expected improvement in the margins and cash profits, that should subside. That apart, it has also announced an increase in its stake to 100 per cent in REpower, as against 95.16 per cent currently. The move will give the company access to additional funds lying in the REpower balance sheet, estimated to be at Rs 1,730 crore.
“REpower’s cash can be used to partially fund a FCCB redemption in 2012-13,” says Shilpa Krishnan, analyst at JP Morgan, in a recent report. Assuming that FCCBs due in 2012-13 are not converted, the total FCCB redemption amount stands at Rs 2,570 crore, she believes. This amount is almost 20 per cent of the total debt, which stands at about Rs 12,000 crore.
So, overall this gives positive signals that the company can now meet its redemption obligation. In addition, analysts believes Suzlon will also be able to consolidate the balance nine per cent of REpower’s net profit, which could add another Rs 32.3 crore to 2011-12 consolidated profits. Besides, the company recently announced that it will raise $150 million or Rs 675 crore from FCCB to be listed on the Singapore Stock Exchange, which will be converted at Rs 54.01 a share. Analysts are also expecting the recovery of Rs 1,000 crore from debtors, 27 per cent of the outstanding debtors in 2010-11, in the second-half of the financial year 2012.
While these developments address some of the liquidity concerns, investors need to keep an eye on the high debt levels. Also, the pace of recovery in the US and European markets and oversupply in the industry are key business risks for the company.
